Why Advertisers Are Questioning How Agency Trading Desks Work

It’s one of the issues advertisers say concerns them most: Exactly what are agency trading desks charging them for?

For major ad holding companies, their “trading desks” are a bright spot. These programmatic ad operations — which buy ad space for marketers using complicated automated systems — continue to gain traction.

But as more advertising dollars pass through these programmatic groups, agency clients are increasingly asking questions about how they work and what, exactly, their money’s being spent on. One crucial question: are agencies using their programmatic units to buy ad inventory and to resell it to clients at an increased price?

“Our members continue to voice concern about the transparency of trading desks,” explained Bill Duggan, group executive vice president at the Association of National Advertisers. “It’s become a complicated environment with a lot of things going on behind the scenes.”

Recent research conducted by the ANA and market research firm Forrester found that trading desk transparency ranked among marketers’ biggest concerns about media buying, Mr. Duggan said.

Some firms say they’re very clear that their programmatic operations don’t charge the way agencies usually do. For instance Xaxis, a division of WPP’s GroupM media buying division, does not charge clients a fee based purely on the cost of the ad space it buys as a media buying agency typically would. Rather, Xaxis says it bundles ad space together with data, technology, and human resources, and arrives at a price for the combined product.

That means clients have little visibility into what portion of their ad budgets are spent on costs such as ad space and technology, and how much Xaxis is keeping for itself. “The Xaxis business model involves a single price for people, data, technology and media, so the underlying costs are not disclosed,” explained Rob Norman, chief digital officer of GroupM’s global operations. GroupM emphasizes it’s clients must “opt in” to working with Xaxis, and that the Xaxis model is different from other agency businesses in its group. Mr. Norman said GroupM does not consider Xaxis a trading desk, but a “programmatic technology and media platform.”

At times Xaxis agrees to purchase ad space from media companies before reselling it to clients. Historically agencies have not typically owned ad space themselves before selling it on. Rather, they’ve simply purchased it on behalf of their clients. GroupM says this practice enables it to secure cheaper ad rates that are beneficial to clients, but some industry executives say it might also allow the company to sell that inventory for more than it paid, since it declines to disclose that information.

GroupM says it’s not that simple, and that inventory is just one of the ingredients that goes into the final product it sells.

“Does the advertiser pay more than the underlying price of each impression? Sure, but that’s irrelevant. The advertiser buys an audience, an objective or an outcome at a price that reflects value,” Mr. Norman said.

WPP isn’t the only major holding company to take this package-like approach. Speaking with CMO Today on Thursday, Omnicom Media Group’s Chairman and Chief Executive Officer, Daryl Simm explained that its Accuen trading desk is compensated by some clients in a similar fashion.

“We make a commitment to deliver a particular cost effectiveness to clients. The difference between the buy and sell price of the media is what pays for the technology and our margin,” Mr. Simm explained, adding that Accuen itself takes on the “risk” of owning that ad space. In other words clients pay Accuen for specific outcomes, without complete visibility into what it costs Accuen to deliver those outcomes.

During an earnings call Tuesday morning, Omnicom’s Chief Financial Officer Randy Weisenburger described Accuen’s model, including the practice of buying media and reselling it at an increased price, as “a little bit of a different business model than a straight agency-type model.”

Omnicom’s trading desks model, like WPP’s, is an opt-in one. It’s customers don’t have to use Accuen if they don’t want to. However both Mr. Simms and Mr. Norman said campaigns purchased through Omnicom and WPP’s respectiv programmatic offerings perform extremely well and provide efficiencies for their clients. According to Mr. Norman, Xaxis clients are happy with its performance regardless of its lack of disclosures, or they simply wouldn’t agree to use it.

“We established Xaxis to create value for clients and for ourselves. Use of Xaxis has always been subject to specific opt-in contracts from our clients, and its continued use is always subject to its performance. We absolutely respect the rights of our clients not to use Xaxis for any reason, but encourage them to at least test its performance,” Mr. Norman said.

Still, some holding companies say they’re doing things differently to both WPP and Omnicom. Publicis Groupe’s programmatic buying group, dubbed Audience On Demand, says it charges clients on a simple fee basis, and is entirely transparent about how much of their budgets are allocated to media, data, technology, and other costs. It also says it doesn’t resell ad space to clients for profit. If an AOD client wants to know how much it paid for inventory AOD is happy to provide them with that information, the group’s president Marco Bertozzi said.

“We have stuck to buying [ad space] in real-time, to not taking positions on media, and to charging fees,” Mr. Bertozzi said. “As soon as you go behind the curtain, the advertiser can’t look at you and trust in you, regardless of what you say about how good your performance is,” he added, in reference to the practices of other agency-owned programmatic ad groups that choose not to disclose media costs and other information about their practices.

Mr. Bertozzi pointed out that programmatic advertising is a relatively new phenomenon, however, and that the landscape is changing quickly. As a result, agencies and other companies related to programmatic advertising are experimenting with a range of strategies and models. Currently AOD plans to give its clients as much information as they require about its practices, however.

“[Trading desks] can hide behind a curtain, but when their clients want to dig deeper they have to say, ‘we’re not going to tell you anything more.’ From where we stand we give them the information up-front. That’s just the route we’ve chosen to go down. At the end of the day it’s about reassuring clients, and our clients know what they’re paying for.” Mr. Bertozzi said.

Executives from Interpublic Group, the fourth biggest ad holding company by revenue, were not available for comment on this story.

Paul Rostkowski, president of MDC Partners-owned trading desk Varick Media Management, said his company currently takes an “opaque” approach more akin to that of Xaxis and Accuen than AOD. It too charges clients for specific outcomes, rather than a fee based on the cost of the ad space it sells.

However, Mr. Rostowski predicted that clients will begin to push for greater transparency across the board. “Right now many models are being tested and tried. In my opinion the market will become more transparent, and myself and people like me will have to build models to support that. It’s early days in this space, but I think the market will move us,” he said.

To Mr. Rostowski’s point, it’s ultimately it’s up to clients to decide which models they’re comfortable with, and which perform best for their purposes. Like trading desks, each client and campaign differs from the next.

According to the ANA, it’s up to marketers to be inquisitive and to ask questions of their agencies, and to take time to understand their respective practices.

Comments (5 of 8)

Whether or not brands begin to build trading desks in-house or agency Trading desks disintegrate, two key questions must be asked here:
1. Drivers. "Why?" do agencies feel the need to invent new ways to make incremental margins without full disclosure to clients? What drives this tendency towards lack of transparency? I believe it stems from the increasingly squeezed margins that agencies make these days (partly due to overzealous procurement departments, increasing employment costs and of course because the Agencies keep saying "yes" to lower fees!) and the need to find some way to provide for a realistic bottom line margin to ensure they can continue to provide quality services to their clients. In 2014 the average operating profit for the Top 50 UK Independent Marketing Agencies sits at 8.7% (Kingston Smith, Financial Services Report). This is 6.3% below the minimum profit margin of 15% that Kingston Smith says is required to have a viable business with continuity! No wonder Agencies are looking for ways to make greater margins out of the same volume of dollars. For years Agencies have had to watch as Ad Networks and now DSP's have creamed billions of $$$ via arbitrage and mark-ups. Now when they do the same and provide even better results for their clients, they are told they are not being “transparent”! Maybe so, but they have to earn a living!
2. Double Standards. There seems to be very little (if any?) discussion around the margins that the DSP's make versus what Agencies make from their trading desks? Why do brands seem to be up in arms about the margins their loyal agency is making (presumably hitting all the required KPI's) and then not question at all the margins that a DSP are making (whether working directly with them or via an Agency)? Most of the DSP’s charge a set CPM for their “bundled” services. It doesn't reduce during a campaign period if the cost of inventory reduces. So by that rationale they are generating arbitrage. No one blinks an eye. But if an Agency tries this, they are crucified for lack of transparency! Why does this double standard exist? Fair enough...call the Agencies out on this lack of transparency, but for goodness sake, do it across all those involved in the trading of inventory.

5:23 am December 4, 2014

Mad Woman wrote:

"the machine is the best way to go" machines are just machines without the human brain power. The amount of effort and investment it takes to setup a trading desk as well as getting the right staff with the required skills takes ages, trading desk will not be in house for clients- at least not in the next 10 years, and regardless due to partnerships, interests and human relations there will always be big fish small fish. Dinners, Lunches and ROI are far from disappearing from the advertising landscape. Programmatic is simply a tool that complements the rest of the channels...effectively and in real time.

1:31 pm November 10, 2014

Jon wrote:

Nobody on the brand side is going to be dealing with DSPs...They can barely keep up with regular digital advertising not purchased in real time.

12:58 am August 4, 2014

Ande wrote:

By creating trading desks as another middleman, which then uses a 3rd party vendor DSP to deliver a campaign, the agencies have created a situation where clients will either go directly to programmatic vendors or bring the whole thing in-house. Either way, it's just a matter of time before trading desk turn into a failed experiment.

10:07 am July 30, 2014

Len wrote:

The clients are paying for Trading Desks' use of DSPs and any work involved in setting up campaigns within DSPs' platforms. This is something that can be taken on by agencies if they were chose to use DSPs directly. The creation of Trade Desks just gives the holding companies another share of client money. A lot of direct response clients, e.g. Retailers, are cutting out the agencies all together and training their internal employees on how to use DSPs. Curious if this catches on.

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